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Apple: Is it time to buy the world's largest company?

Opdateret: 30. okt.

We a looking into an uncertain economic environment, and it can be hard for investors to find companies to invest in. Hence, many investors look towards large corporations as they feel safer to invest in than smaller companies. There are no larger company than Apple, and that combined with being the largest position of Warren Buffett, it is naturally that many look in the direction of Apple. The question is if now is the time to invest?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this post, I do not own shares in Apple directly. I do own shares in Berkshire Hathaway, though. I also have a position in Varta that delivers micro batteries to AirPods, while also having a position in Zepp that competes with Apple in the smartwatch industry. If you want to see or copy my portfolio, you can see how to do so here. I should also mention that I own Apple products and that I am a big fan of their products.Nonetheless, I will keep this analysis unbiased. If you want to buy shares or fractional shares of Apple, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started

Apple is a multinational technology company headquartered in California. It was founded in 1976 and made its IPO in 1980. It is now among the largests holdings in the three major indices: Dow Jones, S&P 500, and Nasdaq 100. I believe most people are familiar with Apple, so I won't delve into the company's details. However, I think it is important to know that the company operates in two different business segments: Products and Services. Products consist of iPhone, Mac, iPad, and Wearables, Home & Accessories. Services consist of AppleCare, Cloud Services, Digital Content, and Payment Services. In fiscal 2022, Products contributed approximately 80% of the net sales, while Services contributed 20% of thenet sales. Apple has a very strong brand moat, as it is ranked as the most valuable brand in 2022 by several companies. I will also argue that Apple has a switching barrier, as once a consumer owns multiple Apple products, they become deeply integrated into the consumer's life, making it less appealing to switch to a competitor.

Their CEO is Tim Cook. Before arriving at Apple, he worked in IBM and Compaq until 1998 where Steve Jobs asked Tim Cook to join Apple, where he started as Senior Vice President for worldwide operations. His educational background includes a Bachelor of Science in Industrial Engineering and a Master of Business Administration. Since he has become the CEO, he has done a great job. Apple has doubled its revenue and profit, and the company's market value has increasedfivefold. Looking at employee satisfaction Apple consistently ranks highly on lists of "best tech companies to workfor" and Tim Cook consistently scores over 91 % on employee approval ratings. Tim Cook has also received praise from Warren Buffett, who called him a fantastic manager of Apple. I haven't been able to find much criticism about Tim Cook,however I have read that people are a bit disappointed of him not being more like Steve Jobs, and that he lacks a lot ofenthusiasm and a little innovation. I don't think it is fair to compare Tim Cook with Steve Jobs though, as very few peopleare like Steve Jobs were. All in all, I feel very comfortable with Tim Cook leading Apple moving forward.

I believe that that Apple has a brand and switching moats. I really like the management as well. Now, let us investigate the numbers to determine if Apple meets our criteria for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number we will look into is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all the benchmarks. Apple delivers some of the best return on invested capital (ROIC) I have ever seen. Way above the required 10% in all years over the past 10 years. I'm not sure that the numbers of 2021 and 2022 are sustainable in the long run, but even if they decrease, the numbers will probably still be fantastic. Not much to say, the numbers speak for themselves.

The following numbers represent the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. These numbers are a bit curious as the equity has decreased ever since 2017. There is an explanation for that, and it is that Apple has utilized inexpensive debt to finance buybacks. Apple has a strong balance sheet, but they had a chance of selling bonds at a low rate to boost shareholder returns. It is sensible, and because of that I'm not worried about the equity decreasing.

Finally, we investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after it has covered its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Free cash flow is pretty much consistently growing year over year and Apple delivered a record free cash flow in 2022. Levered free cash flow margin is consistently high, while the decrease in free cash flow yield indicates that the company is expensive. However, we will discuss this further in the analysis.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings.Doing the calculation for Apple, I can see that Apple has a debt-to-earnings ratio of 0.99 years. It is below the required 3 years, meaning that debt isn't something to worry about if you invest in Apple.

Apple is a great company, but no investment comes without risks, and the same goes for Apple. One short-term risk is macroeconomic factors. Apple mentions that a strong dollar, higher freight prices, and labor costs have all influenced the results for fiscal 2022. If these issues continue, they will negatively impact the results in the future. Furthermore, economic headwinds will impact consumer confidence. This implies that consumers are less inclined to purchase Apple products, which are typically sold at a higher price point.The supply chain is also a risk. In their annual report, Apple mentions that a significant portion of their manufacturing is carried out by a small number of outsourcing partners. We have seen how protests at Foxconn's manufacturing facilities have affected Apple, resulting in a shortfall in iPhone deliveries. As a result, Apple had to downgrade its guidance.Protests or other events could occur at other manufacturing facilities in the future. Therefore, having concentrated manufacturing could once again harm Apple in the future. Anti-trust regulations. A company the size of Apple will always be a potential target for antitrust regulators. The U.S. Justice Department has been investigating Apple since 2019 over allegations that it has abused its market power to suppress smaller tech companies, including app developers and competing hardware manufacturers. Rumors have it that Justice Department lawyers are in the early stages of drafting a potential antitrust complaint against Apple. Furthermore, Lina Khan has been appointed as the Chairperson of the Federal Trade Commission, and she is renowned for being a staunch opponent of big tech. Finally, we have seen a lot of regulations in China. And while these do not directly affect Apple, the President of Tencent has recently stated that he believes we will see internet regulations in other markets as well. It just started in China.

There is also a lot of potential for Apple moving forward. Expanding the Services segment. Growing their Services segment could boost profitability moving forward, as it is a higher-margin business than their Products segment. In the fourth quarter of fiscal 2022, the gross profit margin of the Services segment was 70,5% compared to a gross profit margin of 34,6% for their Products segment. While Services haven't grown much from fiscal 2021 (approximately 19% of net sales) to fiscal 2022 (approximately 20% of net sales), it could be something that makes Apple even more profitable in the future. Apple wants to become cash neutral. We observed that Apple generates a significant amount of free cash flow annually.Apple wants to achieve cash neutrality, which means they are exploring ways to increase shareholder returns. It could be through acquisitions or by returning value to shareholders. In the latest earnings call, CEO Tim Cook mentioned that they average one acquisition per month, while CFO Luca Maestri mentioned that they have made buybacks totaling more than $550 billion. As Apple aims to achieve cash neutrality, we can expect management to provide greater value to shareholders through acquisitions, buybacks, and dividends. A strong moat. I already wrote about the strong moat of Apple earlier but when you have a company that is believed to have the most valuable brand in the world by different organizations such as Forbes, this brand is going to protect your investment from competition. Furthermore, brand loyalty among consumers continues to grow steadily for Apple. One example of the high brand loyalty among consumers is their Net Promoter Score of 72, which is one of the highest in the technology industry. The strong brand moat, combined with a switching moat, leads me to believe that Apple is one of the companies with the highest moats in the world. Investing in high moat companies is a great choice.

All right, we have gone through the numbers, potential and risk regarding Apple, and now it is time for us to calculate a price for Apple. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 6,11 which is the EPS from fiscal year 2022. I chose an estimated future EPS growth rate of 9% (Apple expects to grow diluted EPS by 9%), an estimated future PE of 18 (which is double the growth rate, as the highesthistorical PE has been higher), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $64,36. We want to have a margin of safety of 50%, so we will divide it by 2, meaning that we want to buy Apple at a price of $32,18 (or lower, obviously) if we use the Margin of Safety price.

Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating cash flow last year was 122.151. The capital expenditures were 10.708. I tried to look through their annualreport to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used on maintenance. This means that we will use 7.495,6 in ourfurther calculations. The tax provision was 19.300. We have 15.943,425 outstanding shares. Hence, the calculation will be like this: (122.151 - 7.495,6 + 19.300) / 15.943,425 x 10 = $84,01 in TEN CAP price.

The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With Apple's Free Cash Flow Per Share at 6,97 and a growth rate of 9 %, if you want to recoup your investment in 8 years, the Payback Time price is $81,48.

Apple is a great company with excellent management. It is arguably the company with the highest moat in the world, which is probably why Warren Buffett has made it his largest position. There are some short-term macroeconomic risks when investing in Apple, but these won't last forever. Apple has stated that they want to diversify their manufacturing, but until they have done so, it will still be a risk, albeit a short-term one as well. However, antitrust regulations are something that could potentially affect Apple in the long term, depending on how they turn out. Hence, it is something that needs to be monitored if you invest in Apple. Despite the risks, I believe that Apple is a great company, and I will feel comfortable investing in the company in the long term. I doubt that Apple will ever sell at a 50% discount to its intrinsic value, so you will have to decide how much of a discount to the intrinsic value you would like. Personally, I would like to have at least a 30% discount to the intrinsic value of the Payback Time price. This means that I would like to open a position around$114.

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My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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